Canadian National raises rates for using older oil tank cars

CALGARY Feb 12 Canadian National Railway
is charging shippers more to transport crude oil in
older tank cars, one of the first signs that rail operators are
actively discouraging use of the type of cars involved in
several dramatic explosions.

Confirmation of a tiered fee structure for different models
of tank cars comes amid intensified scrutiny on the safety of
shipping volatile light crudes by rail, spurred by a series of
explosions including the Lac-Megantic disaster last summer, in
which a runaway crude train exploded in the center of a Quebec
town, killing 47 people.

Railroads, shippers and regulators across North America have
acknowledged that older DOT-111s tank cars, manufactured before
higher standards were adopted in 2011, often fail during
accidents, making them more likely to spill their cargo and
catch fire.

While new rules to upgrade or phase out cars are under
consideration, it may be months if not years before they come
fully into effect, frustrating many rail companies that often
deal with the public fallout and potentially repair costs.

"CN has structured its rates to create an economic incentive
for customers to acquire, over time, more robust tank cars that
meet the higher safety standard of the more recent CPC 1232
design," said Mark Hallman, spokesman for CN, Canada's biggest
railway and a major player in the oil-rail trend.

On Monday, CN chief marketing officer J.J. Ruest said in a
presentation: "What we do to help ourself is we price crude
differently for different car types. ... The CPC-1232 is our
favorite car when it comes to pricing or attracting business."

The CPC 1232 design refers to a circular issued by the
American Association of Railroads requiring all crude- and
ethanol-carrying cars ordered after October 2011 to have
enhanced safety features, including reinforced outer shells and
protective shields.

Hallman declined to comment on the specifics of the rates. A
source at a Canadian midstream company said CN was charging up
to 5 percent additional freight costs on some DOT-111 cars.

A second source said they were aware that CN had added a
charge in January, shortly after a December 30 derailment in
which a 106-car BNSF Railway Co train carrying Bakken
oil crashed into a derailed grain train and burst into flames.

The shipper said the additional charge could affect the
economics of the booming oil-by-rail trade, which has shifted
from a tiny niche four years ago to a mainstream method of
moving crude from areas ill-served by pipelines, such as the
remote Bakken fields and, increasingly, Canada's oil sands.

He added that there was some dissatisfaction among shippers
who felt the extra fee, which will have a material impact on the
crude-by-rail cost structure, had not been properly explained
and suspected it could simply be a cash grab.

Hallman said the economic incentive for customers to use
safer cars applied to all CN routes but declined to say what the
rates now were for DOT-111 cars or when the changes were
introduced.

NEW RULES, BUT WHEN

CN has supported an American Association of Railroads
recommendation calling for the retrofitting or phase-out of the
old DOT-111 cars and reinforced standards for new tank cars
built in the future.

[For a Factbox on tank car safety see ID:nL2N0L50YF]

Crude-by-rail loadings have ramped up rapidly in Canada over
the last 12 months as producers desperately seek alternatives to
congested pipelines in order to avoid deep discounts of their
crude.

But traders in Canada's oil capital Calgary frequently
grumble about the rates charged by the railroads, arguing
unreasonably high costs will prevent crude-by-rail from becoming
a viable long-term alternative to pipelines.

Thus far, there is no evidence that other shippers are
following suit, although traders are concerned CN may set a
precedent that is quickly followed.

Canadian Pacific Railway spokesman Ed Greenberg
declined to comment on whether CP was charging different rates
for older railcars.

"We are discussing rate structures with our customers as we
work directly with them," he said.

Among U.S. railroads, Kansas City Southern said it
does not currently charge shippers more to use pre-2011 DOT-111
tank cars, according to a company spokesperson.

CSX Corp said it had no comment on another company's
pricing decisions and declined to say whether they would charge
more for older tank cars.

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